Our US Thematic Strategist discusses surging confidence as the political landscape evolves, back-to-school spending starts strong and travel providers enjoy post-COVID demand.

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Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's US thematic strategist. Along with my colleagues bringing you a variety of perspectives, today I'll give you an update on how recent market volatility and the upcoming US election are affecting the US consumer.

It's Monday, August 26th at 10am in New York.

A few weeks ago, we saw really sharp volatility. It was partially sparked by the unwind of the yen carry trade. But there are also renewed fears about a growth slowdown for the US or a possible US recession. Our economists do not think we are going into a recession though, and they have reaffirmed their longstanding view of a soft landing for the economy as a base case. And they think there's a slowdown, but not a slump.

From the more company side, this earning season showed that the US consumer is softening incrementally; but they're not falling off a cliff. Spending is slowing this year, but it's on the heels of what was really high spending over the last couple of years.

We did see some softness during second quarter results around the consumer. Consumer confidence is still intact, and our most recent survey in July showed a pretty strong improvement in sentiment. We think that this is partially a function of the political environment. We ran the survey from July 25th to 29th, shortly after President Joe Biden dropped out of the race and endorsed Vice President Kamala Harris. And we saw the biggest improvement in sentiment was for those who consider themselves middle of the road politically.

Their net sentiment toward the economy improved from negative -23 percent to -1 percent. Net expectations are also really positive for those who identify as liberal. Net sentiment for very liberal respondents is +34 percent, while it's +20 percent for more somewhat liberal ones. Expectations for conservatives are still negative though, but they have improved since the prior wave of our survey.

So, we do think that some of this increase in excitement and increase in confidence has been around the renewed political environment, renewed interest in the race.

As we get close to the end of summer, we note two other key trends. Back to school shopping and travel. So, for back-to-school shopping, we're seeing pretty positive results from our survey. Consumers are reporting they're planning to spend more this back-to-school season versus last year. We saw an increase of 35 percent in spending intentions. And then when we think about the different back to school categories people are spending on, apparel saw the biggest net increase in spending plans versus last year. But we also saw an increase for school supplies and electronics. So, all things very important as the kids go back to school or people go off to college.

Travel's been one part of the market that's held up super well post pandemic. People were very excited to get out there and go on vacations. And we saw, frankly, an unexpected positive level of demand for the past few years, and we didn't see that faster catch up in demand that a lot of people were expecting post pandemic. I know myself; I've been very excited to travel the last few summers. But this earning season we're starting to see more of a mixed bag within the travel space.

Hotels across the board flag softening demand for leisure stays, but business travel has held up well. We saw a different story among the airlines though; several management teams were really emphasizing continued strong demands for air travel. And our survey is supportive of these comments and show that travel intentions remain stable and strong, and plans to follow through on travel that involve a flight also remain robust.

The next three months leading up to the US election will certainly be interesting though, and we'll continue to bring you updates.

Thank you for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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